Sunday, September 24, 2006

The Cumulative NYSE TICK: A Valuable Measure of Short-Term Sentiment

Readers of my Weblog and the daily morning updates on this blog know that I utilize the NYSE TICK statistics quite extensively in my own trading and analysis.

Why? The NYSE TICK represents, at any given moment, the net number of stocks in the broad market that are trading at their offer prices minus those trading at their bids. When the NYSE TICK becomes very positive, it means that traders are lifting offers in the broad market: buyers are quite aggressive. When the TICK becomes very negative, it means that traders are hitting bids in the broad market: sellers are very aggressive.

The swings in the NYSE TICK during the day, then, represent relative swings in short-term trader sentiment. The beauty of the measure is that it is assessing what bulls and bears are actually doing in the marketplace; not what they report as their sentiment or what they try to fool others into believing.

The above chart tracks the Adjusted NYSE TICK (TICK readings rescaled to produce a zero mean and to include high, low, and close readings every minute of each trading day) on a cumulative basis. That means we add the TICK readings to each other (like an advance-decline line) to track the ongoing ebb and flow of trader sentiment.

Let's see what we can learn from the chart.

First, note that--over time--we're getting somewhat lower Cumulative TICK highs and somewhat higher Cumulative TICK lows. I have found in my research a significant correlation between the volatility of the TICK numbers and intraday volatility in the S&P 500 Index. The lower highs and higher lows are telling us that the 2003 - 2006 period tracked is one of declining volatility. I do not think we can confirm that this bull market is over until we see that pattern change: with lower lows in the Cumulative TICK. That would indicate expanding volatility fueling expanded negative trader sentiment.

Second, note the arrows and Xs. It is very common, on a short-term basis, for the Cumulative TICK to top out ahead of the market and to bottom out ahead of the market. The Xs mark price highs unconfirmed by the Cumulative TICK; the arrows point to unconfirmed price lows. In other words, we frequently see shifts in trader sentiment ahead of actual price turns. That makes the Cumulative TICK a useful heads-up when it is above zero and not confirming new price highs and vice versa.

Finally, you can see that short-term market returns are superior when the Cumulative TICK is below zero than when it is above. When the Cumulative Line is above +4000, returns are negative 5-10 days out--a scenario that is unfolding at present. When the Line is below -1000, returns are superior 20+ days out. Relatively consistent high and low (sell and buy) points can be derived by additionally adjusting the line for volatility.

It has been common for the Cumulative TICK to top out well in advance of price during short-term bull swings. Quite often, the measure has regressed toward zero before the ultimate price high was made. I will be watching to see if this pattern plays out in the current market.